Blockholders, Debt Agency Costs and Legal Protection

Abstract:     
We investigate how investor protection influences the blockholder-bondholder conflict. We focus on family blockholders, the typical blockholders with high control motivations and the most common type of concentrated ownership, because blockholder-bondholders agency conflicts are clearest in this case. On one hand, family blockholders can mitigate debt costs through their undiversified investments, inter-generation presence, and firm survival concerns. On the other hand, they can exacerbate debt costs because of their unique power position to extract private benefits, leading to higher bankruptcy risk. The ultimate impact depends on how family blockholders are disciplined, specifically by the investor protection laws. Using international bond issues for 1,072 international firms from 23 countries we find that the presence of a family blockholder increases debt costs but the ultimate impact depends on investor protection: family firms in low investor protection countries suffer from higher debt costs compared to non-family firms, while family firms in high investor protection countries benefit from lower debt costs. Family's presence in management further increases debt costs but we find no effect from superior voting rights. We find no impact from institutional blockholdings and there is no evidence that they discipline family blockholders. The results show the importance of investor protection for debt agency conflicts.

Number of Pages in PDF File: 51

Keywords: ownership structure, family firms, agency costs, corporate governance

JEL Classification: G30, G32, F30

working papers series